Monthly Archives: April 2013

A new study which was released Wednesday by the Consumer Financial Protection Bureau compared payday loans to a carousel, or, in the organization’s words, a “revolving door” of debt, as this short-term loan type continues to court controversy.

The CFPB did not divulge any exact plans going forward prior to releasing the results of the study, but it did hint that it plans to be more hands-on in trying to curtail the contentious practice of financial institutions offering payday loans to consumers. According to the CFPB, even if costs related to payday loans are passed off as fees, these costs do, in fact, compare to an annual percentage rate as high as 300 to 400 percent.

At the same time the CFPB tentatively presented the results of its study, speculation arose regarding a possible crackdown by the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation on payday loans and other deposit-advance products being offered by banks.

“For too many consumers, payday and deposit advance loans are debt traps, and the stress of having to return every two weeks to re-borrow the same dollars after paying exorbitant fees and interest charges becomes a yoke on a consumer’s financial freedom,” postulated the CFPB’s Richard Cordray.

He observed patterns of “high sustained use”, regardless of whether the consumer rolls the loan over or pays the loan off, then turns around and takes on another payday loan or deposit-advance loan. The CFPB’s findings show that the median payday borrower took out a total of 10 loans in one year and paid a total of $458 worth in fees.

The figures were more dismaying for deposit-advance loans, where Cordray noted that “more than half (of the borrowers) took advances totaling $3,000 or more,” and among this group, over half of them had paid off one loan, only to return to take out another within just twelve days’ time.

Canadians continued a years-long national borrowing spree through the first three months of 2013, a new report shows, but signs are emerging that the credit party is coming to an end.

Total consumer debt excluding mortgages ticked 3.9 per cent higher in the first quarter, according to fresh figuresreleased by Equifax. Canadians collectively owe $500.8 billion, up from $497 billion in debt held by households at the same time last year.

“Balances are increasing for bank installment loans, lines of credit and auto loans,” said Cristian deRitis, senior director of consumer credit economics at Moody’s, an agency that monitors debt held by companies, governments and households.

The rise breaks with a deceleration in loan growth that began in 2011, deRitis said.

Big lenders such as the country’s banks as well as policymakers have been calling for consumers to rein in debt levels which have hit record highs. Ultra low interest rates in recent years have fueled demand among consumers to take on credit.

But with consumers collectively now owing more than $1.60 for every after-tax dollar in income, concern is mounting.

Speaking in Washington this week, Mark Carney, the outbound head of the Bank of Canada, said interest rates “could be [moved] higher sooner if this isn’t addressed or this isn’t adjusted in a more timely way.”

The Bank of Canada has kept its key

interest rate at 1 per cent for some time, following the lead of central banks in larger economies that have lowered rates to keep credit flowing in a bid to speed up sluggish economic growth. Lenders rely on the rate to set their own.

The low rates have fueled a real-estate boom in Canada, as well, but that too is coming to an end as banks rein in lending and new rules make borrowing more difficult for homebuyers.

On a brighter note, Canadians were more diligent in making payments on the debts through the first three months of the year. Equifax said the percentage of delinquent accounts, defined as loans that have not seen a payment for 90 days or more, ticked down to 1.19 per cent compared to 1.39 per cent a year ago.

The IAPDA has introduced a new calculator especially for debt burdened consumers to use as a comparison tool of all debt relief options.

This new online calculator will allow a consumer to add up his/her current outstanding debt, input that amount into the calculator along with the number of debt accounts are included in the total debt.

The calculator will then calculate the program/plan scenario of each debt relief option based on this amount of debt. The options compared are debt consolidation loans, consumer credit counseling, debt settlement and making only the minimum payments. The calculator compares for each debt relief option, the monthly payment, the number of months required to complete the program, interest rate and total interest paid.

The calculator will also show the consumer the amount they can save each month by choosing the debt relief option best for them.

A description of each debt relief option including bankruptcy is also offered.

This is a very important tool that consumers can use to assess their debt relief options based on their individual and unique total debt level. Every consumer who is exploring their current debt relief options will benefit from this information when exploring which debt relief option will be best for their unique situation. There is no one size fits all debt relief solution and many factors need to be considered by consumers before moving forward.

Policy makers on the Federal Reserve’s interest-rate setting panel have for the first time identified high student debt burdens as a risk to economic growth, adding to a growing chorus of government officials concerned about households’ education borrowings.

At $1.1 trillion, according to the Consumer Financial Protection Bureau, outstanding student loan debt is the largest consumer debt class after home mortgages. Financial regulators, the U.S. Treasury and the New York Fed have all warned about the possible danger student loans pose to financial stability and the broader economy.

But prior to its March meeting, the Federal Open Market Committee, which sets interest rates that affect trillions of dollars of loans and securities, had never before mentioned student loans as a possible downside risk to the economy, according to a review of past meeting minutes.

According to newly released minutes from the March meeting, some members of the panel mentioned “the high level of student debt” as a risk to aggregate household spending over the next three years.

“There is increasing consensus that student loan debt is having a broader impact on the economy than we think,” Rohit Chopra, the CFPB official responsible for the student loan marketplace, said in an interview.

The committee’s mention of student debt burdens is likely to further discussion in Washington over what, if anything, policy makers should do to rein in what has been diagnosed as a growing problem.

Millions of student borrowers are paying record relative interest rates on their government loans, according to a Huffington Post review, frustrating efforts by the Fed to reduce borrowing costs for households and businesses.

The U.S. government’s funding costs to borrow for 10 years, measured by the yields investors demand to purchase the debt, has averaged less than 2 percent since the summer of 2011. But rates on the majority of loans taken out by undergraduates from the Education Department have remained since 2006 fixed by law at 6.8 percent.

The spread between the two, which experts say is an appropriate way to measure relative rates, since student loans are generally repaid in about 10 years, has ranged from 4.5 percentage points to 5.27 percentage points since August 2011 — the highest gap on record.

Unlike with home mortgages, there are few refinancing opportunities for borrowers with student debt, policymakers have said.

The CFPB in February launched a consultation in part to determine how to increase refinancings.

“Like with mortgages, many borrowers with private and federal student loans have been unable to take advantage of today’s historically low interest environment,” the bureau said in an October report. “While these borrowers may not be in financial distress, they may be paying interest rates that are not commensurate with their risk profile.”

Groups including the National Association of Home Builders, American Federation of Teachers, American Medical Association and AARP, the advocacy organization for older Americans, have written to the CFPB to express their concerns over the possible negative impacts of increasing student debt levels.

“Higher student debt loan burdens impair the ability of recent college graduates to qualify for a loan, thereby increasing the time required for such new households to become homeowners,” NAHB said in an April 5 comment letter.

In discussing the effect of rising student loan burdens on homebuyer demand, the group said: “Anecdotal evidence from our members suggests that this issue is a concern and has been increasing in terms of impact.”

Last week, the American Medical Association said it was concerned about the adverse impact of high student debt levels on the medical profession.

“Debt plays a major role in career decisions and impacts the supply of our nation’s physician workforce,” the AMA said. It recommended variable interest rates on medical student loans that are capped at no more than 5 percent.
Shahien Nasiripour

April is National Financial Literacy month and a great time to remind consumers of the importance of taking charge of their personal financial well-being. Among the important aspects American consumers should know is what to do if contacted by a debt collector about a delinquent or defaulted account.

“While no one really wants to get a call or letter telling them they owe money, consumers need to know they are not alone,” ACA International CEO Pat Morris said. “Each year, for many very legitimate and often unavoidable reasons, millions of consumers fall behind on payments and are contacted by a debt collector.”

ACA International offers helpful tips for consumers to help effectively manage contact from third-party debt collector should the need arise. A third-party debt collector is unique in that they are service provider hired by the owner of the debt (i.e., a creditor or debt buyer) to recover a rightfully owed debt on their behalf.

Know Your Rights. Consumers have important rights under federal and state law, and deserve to be treated respectfully. By law, consumers cannot be harassed, threatened or be subjected to profanity and vulgar language. For more information about consumer rights in debt collection or to ask questions, visit www.askdoctordebt.org.

Communicate. If you hear from a debt collector, avoiding a letter or call won’t make the debt disappear. The reason for the contact cannot be resolved without the ability to communicate; whether it’s to pay an owed debt, verify an alleged debt or confirm that the debt collector has reached the wrong person.

Identify. Debt collectors cannot call anonymously nor present themselves as being a representative of a government entity. When contacted, collectors must identify themselves and the name of the collection agency they represent.

Notify the Collection Agency if you Dispute the Validity of the Debt. By law, the collector must inform you of your right to dispute the debt and provide written verification if you dispute it in writing. All collection activity stops until this verification is provided.

Seek to Work Out Complaints with the Collection Agency.Third-party debt collectors sincerely want to work with consumers to resolve complaints. According to the Council of Better Business Bureaus, in 2012 collection agencies resolved 86 percent of the consumer complaints received.

Protect Your Identity. Do not confirm or provide sensitive personal information (e.g., Social Security number, credit card numbers, and bank accounts) until certain of the authenticity of the debt and the person seeking to collect. Check out whether the collector is a legitimate agency by using the Internet to search the company name or visit www.acainternational.org to see if they are a member. Monitor accounts and immediately report any suspicious or unauthorized purchases to your bank or credit card provider. Importantly, consumers are entitled to a free credit report each year at www.annualcreditreport.com. If you believe your identity has been stolen, contact your local police department and visit www.ftc.gov/idtheft for information on what you should do.

Debt. You’re drowning in it. Creditors call day and night demanding payments that you simply can’t afford. You’ve decided to move forward with debt settlement, still you’re unsure of the process in choosing a debt settlement company.

Industry changes in 2010 offer new protections to consumers in need of debt settlement. Still, you need to research and think through the selection process before making a decision.

Can you say ‘yes’ to all of these points?

A legitimate and honest debt settlement company will easily meet these stringent criteria:
Company is a member of the consumer credit advocate group, American Fair Credit Council (AFCC), formerly known as The Association of Settlement Companies (TASC)

Is compliant with the AFCC code of conduct

Is a member of the International Association of Professional Debt Arbitrators (IAPDA)

Will not require or accept up-front payment just to get the process started

Will not accept money from you, until after a debt settlement plan is successfully negotiated for you, clearly presented to you, and accepted by you

Will not accept you if you can actually pay off all of your debt

Has clearly written policies and procedures about their debt-settlement program

Is a member of the Better Business Bureau and has no less than an A- rating

Has a resolution and review process for customer disputes

Has attorneys with significant experience in credit-industry compliance

Handles client matters—your debt settlement negotiation—in-house

Offers full disclosure of all debt settlement program fees and costs before the start of a debt settlement program

Informs its customers, the IRS classifies any forgiven debt above $600 as income that can be taxed

Requires prospective clients to commit to saving money on their own to fund settlements

Does not handle or escrow money saved by clients because of the risk of embezzlement and fraud

Negotiates on an ongoing basis with your creditors and presents all settlement offers to you for your exclusive approval

How did the debt settlement company of your choice measure up to these standards? If you’ve checked every box, then the debt settlement company you are considering will work in your best interest. If not, keep looking until you are satisfied.

Beware of false promises

Watch for these red flags when considering a debt settlement company. If any of these negative marks surface, just say ‘no’:

Company is not a member of AFCC (formerly TASC)

Company collects money up front or sets fees based on a percentage of your debt

Counselors are paid on commission

There’s no money-back guarantee

Counselors and employees are not experienced and trained in debt settlement and financial matters